Secular Outlook: Implications for Asia‑Pacific Investors

PIMCO’s economic forums are integral to our firm’s time-tested investment process. Three times a year, we gather from all corners of the world to discuss
our outlook for the cyclical horizon ‒ i.e., the next six to 12 months. These discussions inform and influence portfolio positioning and
day-to-day management. But PIMCO has long known that an appreciation of long-term, or secular, realities is equally (if not more)
important; for that reason, once a year, for more than 30 years, we have convened a multi-day session to look out over a longer, three-to-five-year period.

We hope you have had the opportun​ity to review the summary from our secular forum in May: “The New Neutral Revisited,” written by PIMCO’s Group CIO Dan Ivascyn,
Global Fixed Income CIO Andrew Balls an​d Global Strategic Advisor Rich Clarida. In this analysis, the authors identify the six key themes that emerged from
our discussion, as well as six risks (see box below).

These themes and risks have unique implications for Asia-Pacific investors

First, as Asian economies transition from savers to spenders and from exporters to consumers, they are contributing meaningfully to the narrowing of global
imbalances – a potential driver of sustainable regional growth.

Second, Asian fiscal and monetary policymakers – from Japanese Prime Minister Abe to People’s Bank of China (PBOC) authorities in Beijing – are keenly
focused on tailoring economic policies to specific objectives, including Japan’s goal to reflate to its 2% inflation target and China’s efforts to see the
yuan included in the IMF’s special drawing rights (SDR) basket of currencies. On this theme of economic policy, we expect the opening of the Chinese
capital account to be a seminal part of the secular economic story, with significant implications for investors around the world.

Some of the risks noted in our secular outlook will likely have an impact on the Asia-Pacific region: We need look no further than Chinese equity markets
over the last few weeks to see that enormous volatility exists; indeed, the possibility of bursting bubbles, and even recessions, cannot be ruled out.
Moreover, while many Asian economies are focused on increased regulatory oversight, convergence between regulatory frameworks has been limited, creating
challenges in cross-border initiatives.

Given these long-term themes and risks, we see several implications for Asian investors
to consider:

1. Explore better betas and customized multi-asset solutions

2. Combine secular sovereign and corporate “winners” with the strength of the U.S. dollar

3. Be thoughtful about income

4. Consider alternatives and harvest illiquidity premiums

5. Keep a secular eye on India

6. Gain strategic (not just tactical) exposure to China

PIMCO's 2015 Secular Forum

SIX THEMES DRIVING GLOBAL MARKETS

​Converging to New Neutral
potential growth rates
in developed and
emerging economies

Evolving to a re-regulated, better capitalized global banking system​

Moving from energy scarcity to
energy abundance unlocked
by the shale revolution

Accelerating from deflation toward targeted 2% inflation in the major economies

A narrowing in global imbalances as the global savings glut abates

Implementing better economic policy in key emerging as well as developed economies

TAIL RISKS

​A global recession as few countries can maneuver to deploy countercyclical policy

Flash crashes, air pockets and trading volatility, which have a greater likelihood amid diminished liquidity​

A breakout of inflation to the upside of central bank inflation targets

“Disaster risk” relating to geopolitical conflicts​

Policy failures due to fractured politics or implentation challenges​

Better betas and customized multi-asset solutionsAbsolute return, benchmark-agnostic and “smart beta” strategies have increased in popularity throughout Asia-Pacific (and globally) as investors gain
awareness of the limitations of market capitalization-weighted equity indexes and debt-weighted bond indexes. Traditional indexes can be reactive rather
than proactive, and investors in a multi-speed world demand a higher degree of agility. PIMCO has been a pioneer on this front, offering both unconstrained
strategies across asset classes (including credit, mortgages and commodities) and indexes that account for fundamentals rather than simply market-cap or
debt weights. In addition, PIMCO’s customized asset allocation solutions utilize both qualitative “best ideas” models and quantitative mathematical
analysis in seeking to outperform traditional stock/bond combinations. These strategies can serve as prudent first steps for investors who are making
initial offshore allocations, as well as for clients seeking higher return targets with explicit downside risk management.

Secular “winners” and the U.S. dollarDollar-hedged strategies offer investors the opportunity to take advantage of the secular theme of continued U.S. dollar strength. As the Federal Reserve
begins to raise rates while other global central banks continue easing, we see the U.S. dollar continuing to appreciate. PIMCO offers strategies with
established track records to Asia-Pacific investors seeking to access credit markets while mitigating potential currency loss versus the U.S. dollar. We
also expect central bank accommodation to broadly support credit markets, and as PIMCO’s Global Credit CIO Mark Kiesel notes in the
secular credit outlook
, we anticipate this phenomenon particularly in China as the PBOC considers quantitative easing measures. Our credit team is focused on identifying
companies that can benefit from our secular themes, including rising consumption in Asia, housing growth in the U.S. and export growth (given a weak yen)
in Japan.

Being thoughtful about incomeAsia-Pacific investors have long been focused on income-generating strategies, and we expect this trend to continue over the secular horizon. We follow a
disciplined approach to income investing, aiming to outperform our return targets and achieve sustainable yields. PIMCO’s income team has been recognized
for its performance, including in 2013 when portfolio managers Dan Ivascyn and Alfred Murata were honored as Morningstar Fixed-Income Fund Managers of the
Year (U.S.). PIMCO also offers strategies that provide access to bank capital instruments, which have the potential to perform like traditional high yield
bonds or bank equities. The secular theme of intensifying regulation is supportive of this type of strategy, as recent regulations are meaningfully
strengthening the banking sector.

Alternatives and less liquid investmentsAsia-Pacific investors are keenly focused on alternatives, recognizing that these allocations may reduce portfolio volatility, achieve differentiated
returns and capitalize on unique market opportunities. In Asia ex-Japan alone, institutional investor allocations to hedge funds and private equity have
grown from 2.7% in 2010 to 9.9% today; high-net-worth investors in Asia ex-Japan and Japan allocate 14.0% and 13.1% to alternatives, respectively. 1 Similarly, in Australia, institutions have increased their allocations from 7.2% in 2010 to 10.2% today.2 Over the secular horizon,
we expect this investor demand for alternatives to continue expanding. From bank deleveraging-based investments to relative-value sovereign and credit
arbitrage, PIMCO’s alternatives strategies encompass hedge funds (global macro, relative value, commodity) and private equity (opportunistic real estate
and credit). Critical to our alternatives approach is our belief that the illiquidity premium – the reward investors receive for investing in less liquid
assets over an extended period – will remain attractive over the secular horizon. We plan to continue growing this important business.

A secular eye on IndiaTo date, India’s growth story has been challenged by unfavorable business conditions, insufficient infrastructure and obstructive fiscal policies (e.g.,
the tax code). With the election of pro-business Prime Minister Narendra Modi last year and the 2013 appointment of Raghuram Rajan as governor of the
Reserve Bank of India, PIMCO is closely watching for indications of higher sustainable future growth, including infrastructure development, more stable
macroprudential policies, deeper financial markets and simplification of the tax codes.

Raja Mukherji, head of Asia credit, and Luke Spajic, head of Asia ex-Japan portfolio management, recently returned from a trip to India encouraged by the
new policymakers and awaiting additional reforms, which could set the stage for deeper exploration of the investment universe in the country over a secular
horizon.

Strategic exposure to ChinaWhereas India may present an opportunity in the future, the Chinese capital account liberalization story is imminent. On a near-daily basis, we see Chinese
policymakers and regulators opening new doors for offshore investors to access Chinese fixed income and equity markets and global index providers
evaluating Chinese stocks and bonds for inclusion in their benchmarks. As evidenced by recent volatility in China’s stock market, security selection
remains crucial, and liquidity can still be challenging. That said, the PBOC and the central government in Beijing remain committed to attempting a smooth
landing for the economy. So, we think China will continue to grow in importance for the global markets. Indeed, China is already the world’s largest
economy in purchasing-power-parity terms and the third-largest fixed income market. We therefore believe that investors should begin to consider the place
of stand-alone strategic allocations to China, while remaining mindful of volatility and liquidity dynamics. For PIMCO, building a thoughtful presence in
China is a critical secular objective to bring both China-based solutions to global investors and global solutions to local investors.
(For more, see Viewpoint, “Understanding Investment Opportunities in China,” May 2015.)

Evolving with investors and the global marketsPIMCO has established a strong track record of delivering value to investors both in and beyond traditional fixed income; importantly, our secular outlook
supports continued growth in non-traditional fixed income, as well as in multi-asset, “smart beta” and alternatives solutions. We have built world-class
portfolio management and client servicing teams focused on these strategies and welcome the opportunity to exchange views on asset allocation, economic
developments and portfolio solutions to navigate this New Neutral world.

Disclosures

All investments
contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit,
inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with
longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the
current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity
and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Bank loans are often less
liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments
cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s
obligation, or that such collateral could be liquidated. Investing in foreign-denominated and/or -domiciled securities may involve
heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Strategy availability may be
limited to certain investment vehicles; not all investment vehicles may be available to all investors. Please contact your PIMCO representative for more
information. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each
investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment
professional prior to making an investment decision.

The Morningstar Fixed Income Fund Manager of the Year (2013) award is based on the strength of the manager, performance, strategy, and firm's stewardship.